Forget buy-to-let, here’s how to earn a second income!

Forget buy-to-let, here’s how to earn a second income!

Many of us invest in stocks for a second income. Investing in companies that reward investors with dividends allows us to turn our capital into a regular income source.

And that’s very much the same process as the buy-to-let strategy. Investor purchase a house or a flat, and then rent it out for regular returns.

In both cases, these returns are not guaranteed. Landlords can be left a void in the same way that investors can be see the dividend cut if the company runs into trouble.

But, when it comes down to it, there’s only one way forward for me. Here’s why I’d forget buy-to-let investing and buy dividend stocks instead.

It’s all about yields

All in all, rental yields in the UK just aren’t that exciting. Estimates vary hugely concerning the average yield across the country, from around 3% to 5%. In Northern England, some outlets suggest that yields reach as high as 7.4%.

But when it comes down to it, the yield is never as big as we’re hoping for. That’s because stamp duty and other costs aren’t factored into the original or advertised calculations, or because we’ve got management and estate agent costs to subtract from our rental income.

These costs can be substantial. And, of course, many of us can’t just buy a house outright, we need to take a mortgage too. Rental income is also subject to tax.

But when it comes to stocks, I believe it’s much easier to find a better yield, and incur fewer unretrievable costs. Looking at the FTSE 100 today, I can pick a handful stocks, including Phoenix Group and Barratt Developments, with dividend yields in excess of 8%.

While higher yielding stocks don’t tend to offer much in the way of share price growth, I’d forecast these stocks will see their share prices rise faster than UK house prices in the coming years. It’s also worth highlighting that if these stocks are in an ISA wrapper, my dividend income would be tax free.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

The figures

Let’s imagine I have £50,000. I can either invest that in stocks, or I can take out a £100,000 mortgage and buy a home to rent out.

Now, let’s assume I can achieve a 5% yield — that’s pretty good right now. That gives me £7,500 a year, assuming there are no voids.

But I’ve got to factor in my mortgage repayments. Currently, with a 4.5% loan and 25-year plan, my annual repayments on my £100,000 mortgage would be £6,012, leaving me with just less than £1,500 a year in passive income. Yes, I’d be increasing my equity in the property, but it’s a slow process.

I’d also highlight additional costs such as building management costs, furnishing the flat, etc.

The second option is investing in stocks. Some of my favourite stocks include Lloyds, Phoenix Group, Legal & General, and Vistry. Collectively, these stocks would give me a 7.5% dividend yield, meaning I’d receive £3,750 a year as a second income. I’d also hope for around 5% share price growth from these stocks over the coming year.

For me, it’s a no-brainer. Stocks are the way forward when it comes to a second income. I appreciate many investors will enjoy the perceived safety of bricks and mortar, but it’s not for me.

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